THE PRIME MINISTER SHOULD HAVE READ THE ENTIRE C.D. HOWE REPORT
In response to a question by the Opposition regarding our article entitled `”Restoring Integrity and Credibility to the Budget Process”(1) , the Prime Minister replied that according to ``the non-partisan C.D. Howe Institute (2), this government has more transparent public accounts than at any time in history, it is more transparent than any other senior government in the country`` (3). There is no question that there is considerable information in the public accounts, but is this government more transparent than in any time in history or more transparent than any other senior government? Not according to the C.D. Howe Report.
C.D. Howe Institute`s `”Canada`s 2012 Fiscal Accountability Rankings`” looks at the financial information provided by senior levels of government (federal government, provincial governments and the territories) according to “Fiscal Accountability`` and `”Scoring Governments` Over- and Undershoots`” and makes a number of policy recommendations.
Rating Fiscal Accountability
The Report assesses “fiscal accountability” according to the following criteria:
• Are the key spending and revenue totals prominently displayed in budgets and public accounts prepared and presented on the same basis?
• Do the public accounts show and explain deviations from the budget figures?
• Did the auditor give the public accounts a clean opinion?
• How soon after the end of the fiscal year did the public accounts pass the audit? and,
• Does the government publish in-year updates showing deviations from budget plans?
Based on these criteria, the authors give the federal government top marks (an “A” grade). However, New Brunswick and Ontario also received an “A” grade. The federal government, therefore, is not more transparent than any other senior government – it shares that honour with two provinces.
Based on these criteria, the federal government would have received an A grade since 2002-03, when it first included the “Financial Statement Discussion and Analysis” section in the Public Accounts. The claim that this government is more transparent than any time in history is, therefore, also without basis. However, to the government`s credit, it has adopted new accounting standards as issued by the Public Sector Accounting Board since first being elected in 2006
The authors determine timeliness based on when the Auditor General approved the audit of the Public Accounts` financial statements. However, for the federal government, the Public Accounts must be tabled in Parliament. This means that the Public Accounts are usually tabled 2-3 months after the Auditor General has signed off. A better measurement of timeliness would be when the Public Accounts are tabled (4) .
Scoring Governments` Over- and Undershoots
In this section, the authors look at how successful the governments have been in hitting their ``budgeted targets for spending and revenues`”. However, to the best of our knowledge, no senior government has set explicit spending and/or revenue targets over the last ten years covered by this Report. They have focussed instead on setting deficit/surplus targets.
The fiscal and political credibility of any senior government is primarily determined by its ability to hit it`s deficit/surplus target. The Opposition, media, financial analysts and the public primarily focus on this measure. However, attempting to hit a single year deficit/surplus target is extremely difficult, as it is influenced by many factors outside the control of the government, most notably by economic developments. This is especially true for budgetary revenues and for certain components of total expenses. For the federal government, the latter includes employment insurance benefits, public debt charges and most major transfers to other levels of government (which are indexed to changes in gross domestic product).
Forecasting is more of an art than a science. As a result, in order to ensure that the deficit/surplus target can be met, most governments include ``reserves`` in their budget plans. As the fiscal year unfolds, some or all of funds in the reserve may be reallocated to new initiatives. In fact, most governments have stated very clearly that if these reserves are not needed to meet their deficit/surplus target, they would be used to fund new initiatives – reduction in taxes and/or increases in spending. The Chretien government explicitly announced that one-third would be allocated to debt reduction, one-third to tax cuts and one-third to spending. This further confirms the view that they do not set revenue or spending targets. As such, we believe that the focus of the Report, and its resulting rankings, are misleading.
We question the methodology the authors used to calculate the over/undershoots. Over the period 2002-03 to 2005-06, the budgetary revenues and spending forecasts for the federal government were not on the same accounting basis as the final audited results in the Public Accounts of Canada. Certain revenues were netted off related program spending. However, in the Public Accounts, these revenues were included as part of budgetary revenues. This had the effect of increasing revenues and spending by comparable amounts, with no impact on the budgetary balance. To get around this problem, the authors calculated the annual percentage and absolute changes between the budget forecast for the year ahead and the previous fiscal year for spending and revenues. They did the same for the Public Accounts. The differences between these two numbers were used to calculate the over/undershoots for revenues and spending.
At the time of the budget, final numbers for the previous fiscal year are not available. The previous year estimates are based on the financial results to date (usually April to December) and the Department of Finance’s best guess on developments over the balance of the fiscal year and the end-of-year accounting adjustments. The Public Accounts are the final audited results for the year as a whole. As a result, the bases for comparison are not the same and can distort the annual changes between the budget forecast and the Public Accounts results.
However, the Public Accounts includes a detailed reconciliation between the budget forecast and the final results on a consistent accounting basis (5). To avoid any biases in the results, we suggest that the authors use this source to determine under/overshoots.
Based on the reconciliation provided in the Public Accounts, we estimate that, over the period 2002-03 to 2011-12, the federal deficit/surplus turned out to be $24.2 billion better than originally forecast. Spending came in $5.4 billion lower than expected and revenues were $18.8 billion higher. These results are significantly different than those calculated by the authors, which indicated that the federal government overspent by $6.2 billion and underestimated revenues by $16.8 billion, implying that the federal budgetary balance was under estimated by $10.6 billion. Given that the deficit/surplus was not affected by the difference in accounting, there should be no difference between our estimate and that estimated by the authors for under/overshoots in the deficit/surplus.
However, even these results do not tell the complete story. The deficit/surplus during the course of the fiscal year is affected by changes in the economic environment, errors in the economic/fiscal models and the implementation of new policy initiatives. The identification of new initiatives implemented during the course of the fiscal year would be a better indicator of the under/over shoots (6). One would have to go through the individual budgets to derive estimates for the impact of the new policy initiatives – tax and spending changes.
The authors also claim that if all of the spending overshoot for the senior governments, which the authors estimate at $53 billion (7), was applied to reducing the debt, there would have been a surplus of nearly $14 billion in 2012-13 rather than a deficit of about $39 billion. However, this assumes that all of the incremental spending over this period was ongoing, which was not the case. For example, the federal government implemented a number of one-time measures, including $4.0 billion in 2002-03 for health care initiatives, $3.5 billion in 2003-04 for health care initiatives and agricultural support, $3.6 billion in 2004-05 for the Wait Times Reduction Fund and $9 billion in 2009-10 to support the auto sector. Discounting the one-time federal initiatives would reduce the authors` $14 billion surplus to a deficit of about $6 billion in 2012-13.
The authors made a number of policy recommendations. These included:
• Consistent accounting between budget and public accounts;
• More detailed explanations of why spending and revenue differed from budget estimates;
• Improved reporting in the Estimates;
• Improved committee level scrutiny;
• Budget rules and legislation governing windfalls; and
• Timely publishing of year-end results.
The federal government meets the first and last recommendations. But it does not meet recommendations 2 to 4. We have commented extensively on these recommendations in previous blogs and in our article for the Macdonald Laurier Institute ``Restoring Integrity and Credibility to the Budget Process``. The Prime Minister and Minister of Finance were quick to dismiss our recommendations. Obviously, whoever wrote their speaking points was quite selective in using the C.D. Howe Report to counter our claims.
1. "Restoring Integrity and Credibility to the Budget Process" Inside Policy February-March 2013 - Macdonald Laurier Institute and www.3dpolicy.ca
2. "Canada's 2012 Fiscal Accountability Rankings" C.D. Howe Institute Commentary No. 373 Colin Busby and William B.P. Robson . This is the sixth year this publication has been released.
3. "Question Period" March 5, 2013.
4. To release the final audited results on a more timely bais, the federal government, beginning in 1993-94, publishes the Annual Financial Report, which contains final summary financial results. This is usually published in September. It does not meet all of the Report's Fiscal Accountability criteria any more, as it does not compare the audited results to the on-year ahead budget forecast, the focus of the C.D. Howe.
5. This is included in Volume 1 of the Public Accounts of CAnada in the section entitled "Financial Statement Discussion and Analysis".
6. In a review of the government's foecasting accuracy, Dr. Tim O'Neill recommended that the government provide a longer-term perspective on its fiscal forecasting record. In the November 2005 Update, a long-term record was provided, comparing the fiscal estimate for the upcoming fiscal year, as well as in-year updates, to the final outcome as published in the Public Accounts for that year. New policy initiatives implemented during the course of the fiscal year were identified separately. Such a perspective has not been since.
7. We were unable to reproduce this number.